Japan Residential Investment Co Ltd Consolidated Financial Statements

Japan Residential Investment Company Limited is a closed-ended Guernsey registered company established to make and hold investments in residential property in Japan.  The Company presents its unaudited consolidated financial results for the six months ended 31 May 2011.
 
Highlights

• Profit of £4.2 million for the period, versus loss of £9.7 million for the same period one year prior.
• Asset values improved with £138,000 unrealised valuation gain for the period, versus £12.0 million loss during the same period one year prior.
• Portfolio occupancy 95.5% for the six months ended 31 May 2011, up from 91.2% during the same period one year prior.
• Net debt to asset ratio1 of 47% at period end, down from 62% one year prior.
• Underlying profit2 increased to £4.0 million, up 37% from the same period one year prior.
• Distribution of 1.5p per share in respect of the six months ended 31 May 2011.

The Chairman issued the following statement
The Board of Directors extends its heartfelt sympathies to all those who have suffered as a result of the earthquake and tsunami that struck north east Japan on 11 March. I am thankful to be able to confirm that there have been no reported injuries at any Fund properties as a result of the earthquake and no significant physical damage to the portfolio has been observed.
 
Portfolio occupancy remains strong, averaging 95.5% for the six months ending 31 May 2011, an increase of 4.3% over the same period one year prior. The continued strong operating performance is a testament to the resilience of the residential property sector and the merits of a diversified portfolio focused on newer properties in good locations of major urban markets.
 
Results
The Fund recorded a profit of £4.2 million for the six months ending 31 May 2011, a period marked by an end to the downward trend in property value that began in Autumn 2008. The modest gain of £138,000 on investment property in the first half stands in sharp contrast to the loss of £12.0 million over the same period one year prior. Despite the sale of two assets in 2010, net rental income rose 10.9% to £7.4 million for the six month period, driven by increases in tenant occupancy, reduced leasing expenses and a stronger yen.
 
Lower financing costs resulted from the successful execution of the debt reduction plan established in conjunction with last year’s capital raising and contributed substantially to profits in the first half of 2011. Interest and debt financing costs declined to £1.5 million from £2.4 million in the same period one year prior. Underlying profit – profit excluding losses from fair value adjustments, foreign exchange and other capital items – was £4.0 million, up 37% from the same period one year prior.
 
Net Asset Value (‘NAV’) as at 31 May 2011 was £120.8 million or 64.4p per share, a decrease of £1.4 million or 0.8p per share since 30 November 2010. Reductions in NAV from distributions in the amount of £2.8 million as well as net currency translation and foreign exchange movements of £2.7 million were largely offset by underlying profit of £4.0 million and a net gain on fair value adjustments of £118,000.
 
The Fund share price discount to NAV, approximately 41% immediately following the June 2010 capital raising, has narrowed to 28% as at 31 May 2011.  As of the time of this writing, the discount has narrowed further as a result of a 7% increase in the Yen/Sterling exchange rate.
 
Borrowings
The Fund held debt totalling £121.7 million against Investment property totalling £231.7 million, for a loan-to-value (‘LTV’) ratio of 53% as at 31 May 2011. Gearing was 47%, calculated as total debt less cash and restricted reserves as a proportion of Investment property. The weighted average interest cost was 1.9%.
 
The next refinancing event is ¥7.0 billion (£52.1 million) of debt maturing in May 2012. This debt has an LTV of 61% and is collateralisedby a portfolio of predominantly Tokyo assets. Based on improvements in the credit markets and discussions with lenders, the Investment Adviser is confident of the Fund’s ability to secure replacement financing for this portfolio in 2012.
 
Outlook
Reconstruction spending and export growth in the second half should mitigate the expected economic contraction in 2011. Economists forecast that Japan will return to positive GDP growth in 2012. Asset values have stabilised as indicated by the modest valuation gain on investment property during this period. Our diversified portfolio focusing on major metropolitan areas continues to generate stable, resilient cash flows. The real estate fundamentals which have supported strong Fund operating performance remain in place. With moderate gearing and significant cash reserves, the Board intends to maintain a prudent distribution policy.  The Board continues to focus on enhancing Fund performance and increasing the Fund’s profile in the marketplace.  We are optimistic that these efforts will support a continuing trend towards narrowing the discount and achieving our stated goals of stable income and capital appreciation.